Insurance, takaful sector earnings set for recovery


RAM Rating Services Bhd co-head of financial institution ratings Sophia Lee

PETALING JAYA: The local insurance and takaful sector earnings are expected to stage some recovery this year amid volatility in the global financial markets, according to RAM Rating Services Bhd (RAM Ratings).

Its co-head of financial institution ratings Sophia Lee said while the sector’s profit performance last year was marred by outsized investment-related losses and higher claims and payouts of policy benefits, she anticipates some earnings recovery this year even as financial markets could remain volatile given global uncertainties.

Notwithstanding headwinds, she told StarBiz the sector is well-capitalised to absorb potential shocks.

RAM Ratings has retained its stable outlook on the Malaysian insurance and takaful sector, which is expected to stay resilient in the face of a changing landscape, market volatilities and normalisation of claims towards pre-Covid-19 pandemic levels.

“We project a year-on-year (y-o-y) expansion of 8% for the life and family takaful sector’s new business (NB) premiums and contributions for 2023 against 3% in 2022 and 18% in 2021.

“Growth would be supported by sustained property market activity which underpins demand for mortgage insurance and takaful protection as well as an increased awareness of the need for life and health protection,” Lee noted.

Mortgage term takaful has been a primary source of growth for the family takaful segment in particular, which grew strongly in 2022 (plus 18% y-o-y).

This more than offset the 6% contraction of the conventional life insurance segment. Notably, Malaysia’s takaful market is one of the largest and fastest-growing takaful markets globally.

“NB expansion in the life and family takaful slowed last year – falling short of our expectations – due to the pullback in demand for investment-linked (IL) products (minus 22% y-o-y), on account of the challenging and volatile investment conditions then, and the expiry of loan moratorium to some extent.

“Demand for IL products should recover alongside investor sentiment,” she noted.

The long-term growth prospects of the domestic life and family sector continue to be anchored by key structural factors such as favourable demographics and keener interest in medical coverage in light of high healthcare cost inflation.

Better financial literacy, and efforts to simplify protection products and improve affordability and accessibility (via more digital modes) would culminate in higher insurance and takaful penetration in the long run (measured by premiums to gross domestic product), she said.

Bank Negara’s Financial Sector Blueprint targets a 4.8%-5% insurance and takaful penetration rate by 2026. RAM estimated the current rate stands at 4.6%.

On the other hand, the non-life sector saw a stellar 12.0% growth in 2022 versus 3.8% in 2021supported by all-time high car sales and improved economic conditions. All segments saw growth last year, with the motor class being the strongest contributor (plus 12% y-o-y).

Following the lifting of the sales tax exemption, car sales and by extension, motor premiums and contributions are expected to come in lower this year, Lee said, adding that this underpins RAM’s projection that growth in the non-life sector would be flat at best in 2023.

Meanwhile, the recent adoption of Malaysian Financial Reporting Standard (MFRS) 17 Insurance Contracts would limit direct comparability of premium volumes, and by extension, earnings performance against prior years.

The new accounting standard – which outlines new requirements on the recognition and measurement of insurance revenue and liabilities – would see a change in how premiums and profits are recognised, under the new standard, profits would be amortised over the policy life versus full recognition in the first year.

Commenting on this accounting standard, Loh Kit Yoong, RAM Ratings specialist said: “It is important to note that the profitability of insurance contracts does not change with the new standard even though the manner in which revenue and profits are recognised would differ.”

He said the impact is not expected to be material for non-life players given their shorter-term contracts but would be significant for life and family takaful players, especially those with sizeable single-premium portfolios.

Separately, insurers’ regulatory capital computations and requirements would be unaffected until after 2024 at the earliest, as the central bank is reviewing the capital frameworks for insurers and takaful operators (ITOs).

The capital position of the sector stayed sound with a capital adequacy ratio of 226% as at end-December 2022 (end-December 2021: 224%).

On another note, Lee said: “The push for digital as well as more innovative solutions through the central bank’s financial technology sandbox would help narrow the protection gap in respect of the unserved and underserved, as the effectiveness of traditional distribution channels has proven limited in this regard.”

To better facilitate the testing of new ideas in the sandbox, Bank Negara has proposed simplifications to the eligibility assessment criteria, and a fast track for institutions with strong risk management, governance and compliance capabilities in a recently released exposure draft.

There are currently six participants in the sandbox, Ringgitplus, Vsure and Tune Protect Life, among others, which could be candidates for a digital ITO licence.

The central bank expects to finalise the policy document for digital ITOs this year and invite applications from potential licensees.

RAM Ratings said the evolving operating landscape towards a greater digital push, added with ongoing structural reforms, complex MFRS 17 implementation, and increased mergers and acquisitions (M&As) mean that ITOs will need to up their game to stay competitive, even whilst navigating these challenges.

“The revival of M&A activity could also bring about some shifts in market dynamics, particularly in the non-life industry where there has been some degree of market consolidation after AmGeneral-Liberty’s and Generali’s respective corporate exercises.

“Recent market news of potential M&As (Berjaya-MCIS, Tokio Marine’s plan to dispose of South-East Asian operations) may still signal further activity on this front,” the rating agency noted.

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